(Kitco News) – Gold prices saw another dramatic week, as early momentum from dollar weakness and lingering fiscal concerns reversed after Fed Chair Kevin Warsh used his Jackson Hole speech to reinforce the central bank’s inflation-fighting stance and revive expectations for a September rate hike.
Spot gold kicked off the week trading at $4,618.79 per ounce on Sunday evening, and the yellow metal pushed higher through Monday as traders continued to digest the prior week’s Treasury buyback announcement and its implications for long-term yields, U.S. debt sustainability, and hard-asset demand. The rally extended Tuesday, when softer consumer confidence and trader positioning ahead of Wednesday’s inflation and growth data helped gold set its weekly high of $4,697.66 per ounce.
Gold’s advance began to falter on Wednesday morning, even after core PCE inflation and second-quarter GDP data did little to change the broader view that the U.S. economy remains resilient while inflation remains elevated. Gold slipped back below $4,600 as yields firmed and traders became more cautious ahead of Warsh’s Jackson Hole remarks.
Selling accelerated Thursday as stronger Fed rate-hike expectations, a firmer U.S. dollar, and higher short-term Treasury yields pressured non-yielding assets. Spot gold fell to its then-low of $4,566.17 per ounce on Thursday, before momentum shifted once again, with traders bidding the precious metal all the way up to $4,631.98 early Friday morning.
But Warsh’s hawkish tone from Jackson Hole turned sentiment sharply bearish, and gold prices fell well over 1% in the hours that followed. Spot gold ultimately set the weekly low of $ 4,445.45 just before 3 pm ET, before the metal managed a modest uptick to close the week at $4,455 per ounce.
The latest Kitco News Weekly Gold Survey showed half of Wall Street still bullish even after gold’s dramatic Friday slide, while Main Street sentiment pulled back from last week’s high-water mark.
“Lower,” said Adam Button, head of currency strategy at investingLive. “He can pretend it's not forward guidance, but Warsh signaled that he's going to hike in September. Pricing has risen to 50/50, but it needs to get to +80% for a hike.”
Marc Chandler, managing director at Bannockburn Global Forex, said gold was already struggling to maintain upside momentum after peaking near $4697 earlier this week.
“The momentum indicators are rolling over, and I look for a stronger dollar ahead of the US jobs data at the end of the next week,” he said. “I anticipate a break of $4555, with losses extending toward $4500-$4527.”
“That was quick,” Chandler added after Warsh’s speech provoked gold’s steep slide. “I am thinking now $4440, and maybe $4360.”
“Up,” said James Stanley, senior market strategist at Forex.com. “I think we’re seeing a healthy pullback after the Warsh speech, and I think that longer-term the path is still the same as there’s no mention or thought of austerity, or of the US government borrowing less. I think the speech was designed to try to keep Treasury yields in check, but at the end of the day, I do not expect Warsh to err on the side of hawkishness, so I’m still bullish gold on that basis.”
“42,” said Darin Newsom, senior market analyst at Barchart.com. “You may be wondering about my answer. Some will recognize it from The Hitchhiker's Guide to the Galaxy as the ‘Answer to the Ultimate Question of Life, the Universe, and Everything.’ What does it tell you about my thoughts on Gold next week? I have no idea.”
“Last week, I was with everyone else in saying the market should go up, based on continued bullish fundamental factors,” Newsom said. “When I found out Kitco’s poll last week was “bereft of bears”, my ‘Blink’ reaction was that the market would go lower. And it has, after initially closing higher Monday. While I have no idea what next week might bring, fundamentally speaking I’d rather be long than short long-term.”
“Unchanged,” said Adrian Day, president of Adrian Day Asset Management. “After the largest monthly gain since 1999, gold is due for a pause, and Federal Reserve chairman Kevin Warsh’s big Jackson Hole speech may provide the rationale. But it will be only a pause: the size of the fiscal deficits around the world with high-debt servicing costs and the stubbornness of inflation, with the former arguing against the rate hikes that the latter requires, demonstrate the dilemma to which gold is the only answer.”
“Up,” said Rich Checkan, president and COO of Asset Strategies International. “Federal Reserve Chairman Warsh will resist higher interest rates because of the $40 trillion debt. Treasury Secretary Bessent is trying to manage the yields on Treasuries for the same reasons. All their solutions are inflationary in the long term.”
“Gold is going higher,” Checkan said. “Dips should be viewed as short-term. Embrace them to buy well.”
Daniel Pavilonis, senior commodities broker at StoneX Group, told Kitco News that Friday’s move lower in the metals was the culmination of all the morning’s data combined with Warsh’s hawkish tone.
“Rates look like they're [heading] higher, and I think that's putting pressure on the metals,” he said. “The dollar being up so much, that's going to pressure commodities, and the possibility of raising rates in December, that might contain any kind of bullishness in the metals.”
That said, Pavilonis thinks the economy looks fine overall. “Inflation is not too far out of range, and it seems like the economy is growing, earnings are fine,” he said. “So what's the problem? Are they jawboning the market and talking about higher rates to signal restrictiveness, and let things go?”
He noted that the rate hike odds for September have moved higher, and December's odds moved a lot higher, while the yen has weakened versus the dollar. “These are all negative signs for the metals to move higher,” he said.
Pavilonis agreed that Friday’s price declines were likely just the metals digesting the news and finding their new level based on the updated rate expectations. “The hard inflation without any kind of restrictiveness from the Fed is bullish for metals,” he said. “With a little bit of hawkishness, it's not going to be an easy path forward.”
Going forward, Pavilonis said he wants to see how this plays out over the next couple of weeks. “If the inflation story just dies down a little bit, maybe there is a true deal with Iran and Iran and oil starts flowing normally, then things start to roll over a little bit,” he said. “The inflation data looks a little bit more positive. I think that would be a pretty good risk environment for the metals.”
This week, 21 analysts participated in the Kitco News Gold Survey, with Wall Street sentiment split fairly evenly between the bulls and everyone else. 10 experts, or 48%, expected to see gold prices gain ground during the week ahead, while six others, or 29%, saw the yellow metal falling further. The remaining five analysts, representing 24% of the total, called for consolidation at the new lower levels, or saw the yellow metal’s drivers as evenly split.
Meanwhile, 207 votes were cast in Kitco’s online poll, with Main Street investors scaling back their bullish majority after gold’s late-week weakness. 121 retail traders, or 59%, looked for gold prices to rise next week, while 44 others, or 21%, predicted the yellow metal would lose ground. The remaining 42 investors, representing 20% of the total, expected to see sideways trading during the week ahead.
Next week’s economic news is focused on U.S. employment, but market participants will also be watching key manufacturing and services sector surveys, along with two central bank rate announcements.
The calendar kicks off on Tuesday morning with the ISM Manufacturing PMI for August, as well as JOLTS job openings. Later in the evening, the Reserve Bank of New Zealand will issue its monetary policy decision.
Wednesday morning brings ADP private sector nonfarm payrolls, followed by the Bank of Canada’s monetary policy decision. Then on Thursday, markets will watch for weekly jobless claims, followed by the ISM Services PMI.
The week’s data culminated with the Friday morning publication of the Nonfarm Payrolls report for August, with traders looking to see if the U.S. government’s key employment metric will undershoot expectations for a fourth straight month.
Fawad Razaqzada, market analyst at Forex.com, said gold has moved below the key $4,655 resistance area he was watching earlier this week.
“At the time of writing, the metal was below the 200-day but was testing the short-term bullish trend line,” he said. “Next support is seen around the 4436 and then 4400 area. It would be a bearish technical development if the buyers don’t show up are those levels.”
Sean Lusk, co-director of commercial hedging at Walsh Trading, told Kitco News that precious metals were up ahead of Warsh’s speech before giving it all back, but the stock market didn’t see much of a negative reaction.
“We've had a nice $500 bounce here,” he said of gold’s recent rally. “Silver has regained some footing, rallied $15 dollars off the summer lows, and crude oil is subdued. The market was starting to really fear that we're heading back towards $100, and it stopped dead in its tracks at $87, $88, which gives more credence to [the idea that while] not a lot of barrels are moving out of the Strait, some are moving, and they're finding other ways, and other countries have stepped up production.”
“I wouldn't want to be short [oil] personally, but that's where we're at here.”
Lusk said that he believes Warsh is signaling that rate hikes are in the pipeline.
“He meant his words,” Lusk said. “They're probably going to do a quarter-point, and they're going to price it in, so I think it's become more of a reality. But we’re also starting a new month next week, we're going to have a new round of employment data next Friday, and we're going to look at that.”
“For the market, we just can't get too far ahead of ourselves,” he cautioned, “because there's so many interchangeable parts: tariffs, trade wars… I think they're just taking their time in a step-by-step approach. But it seems like a lot of [FOMC] members are leaning towards a tightening policy near-term here.”
As for the metals in particular, Lusk expects them to stay bid up until the midterms. “Once an unknown becomes a known, that's when you're going to sell off. Seasonally, they run the gold market up into early September, then they back it off again, run it up again in October, it’s Diwali in early November, and then they back it off again, and then it gets cranked from November into mid-December around Christmas. I'm looking [at gold from] that seasonal bias and perspective for the remainder of the year.”
But the midterms – and the potential for political upheaval – could still disrupt the seasonal patterns. “That doesn't take into account any ‘black swan’ entering in the market from here.”
Alex Kuptsikevich, senior market analyst at FxPro, expects gold prices to climb from their Friday lows next week, and said the late-week selloff has cleared a path higher.
“Gold corrected in the second half of the week, taking a breather after an 8.5% rally over five trading days, with spot prices hovering around $4,700,” he wrote. “During the latest correction, gold found support from buyers on dips towards 4,600, signalling fairly strong buying interest. The impressive performance of palladium (+7% on Friday) and silver (+2.5% for the week, hitting new highs since June and rising above $70) suggests that what is happening with gold is nothing more than a local shake-out.”
“The rise in gold that began five weeks ago started from the classic 61.8% Fibonacci retracement level, which suggests a resumption of upward momentum, as does the strength of the subsequent rally,” Kuptsikevich said. “In light of this rise, the latest profit-taking should effectively alleviate short-term overbought conditions, clearing the way for the price to move higher. The impressive rally in related markets (other precious metals, cryptocurrencies, selected equities) merely confirms the global appetite for assets outside the dollar zone, driven by the Treasury’s intentions to limit the sell-off of Treasuries and the Fed’s Warsh turning a blind eye to inflation.”
Michael Moor, founder of Moor Analytics, expects to see gold prices post fresh gains next week.
“In a Higher timeframe: I cautioned on 8/16/18 the break above $1,183.0 warned of renewed strength,” he wrote. “We have seen $4,443.1. These are OFF HOLD. We held exhaustion with a 56268 high and rolled over $1,651.1. This is OFF HOLD. On a medium timeframe basis: The trade below 52554 projected this down $740 (+)—we attained $1,300.0. The trade below 52036 brought in $1,248.2 of pressure. The trade below 51606 brought in $1,205.2 of pressure. These are ON HOLD. We held exhaustion with a 49177 high after a pullback and rolled over $962.3. The break below 48185 projected this down $185 (+)—we attained $863.1. The trade below 47923 projected this down $205 (+)—we attained $836.9. The break below 47420 brought in $786.6 of pressure. These are ON HOLD. We held macro exhaustion with a 39554 low and bounced $799.6—if we continue in a bona fide bullish correction, the minimum target is 49636. This is OFF HOLD.”
“On a lower timeframe basis: We held exhaustion with a 40190 low and bounced $736.0,” Moor said. “The trade above 41192 brought in $635.8. On 8/4 we left a bullish reversal—we have rallied $632.6 from the 41224 open. The break above 41389 projects this upward 345.00 (+)—we attained $616.1. On 8/5 we left a major bullish reversal—we have rallied $449.8 from the 43052 close. The break above 44170 (-3.6 tics per/hour) has brought in $338 of strength. The break above 44311 (+13 tics per/hour) has brought in $323.9 of strength. The trade above 44853 (-2 tics per/hour) has brought in $269.7 of strength. Taking out 46240-71 was a sign of continued strength—we have rallied $127.9 since then. A maintained gap lower will leave a minor bearish reversal.”
At the time of writing, spot gold last traded at $4,454.99 per ounce for a loss of 3.36% on the week and 3.20% on the day.
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